Author Topic: Is 4% withdrawal rate enough for 100% FI success?  (Read 1238 times)

helloyou

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Is 4% withdrawal rate enough for 100% FI success?
« on: July 07, 2020, 05:55:13 PM »
Hello

I've seen many members in this forum saying I haven't saved enough and that I should have a higher net worth OR to get some part-time work to prevent my portfolio from depleting:
https://forum.mrmoneymustache.com/case-studies/is-it-good-enough-to-fire/msg2659513/#new

So I have to date about 4% or 25x expense saved and it seems that there are studies (Trinity Study) on the probability to have the portfolio depleted based on withdrawal rate:
 
http://www.xp-capital.com/uploads/4/1/3/7/41377019/trinity_study.pdf


So it looks like if get a conservative 4% withdrawal rate with 75% stock / 25% bonds I have 100% chance (compared to the previous 100 years period) to still have my portfolio available by the end of this period?

And by the way, a 4% rate is still low enough to allow the portfolio to keep growing infinitely:



Is planning for a 3% or even 2.5% withdrawal rate too much? I regularly see it from members so I thought it would be the right thing, but maybe it isn't? There's obviously no harm in doing too much of course, but if it's not needed, why not just enjoy FI when you know you got 100% chance of success?

What do you think?


Source:
https://en.m.wikipedia.org/wiki/Trinity_study?fbclid=IwAR3Et8EDkI2ksagCAlUrmPJE_UN2Vv8c6qlS2BOzYrJKR_AnaGdBKcm4JDM
« Last Edit: July 07, 2020, 05:58:51 PM by helloyou »

secondcor521

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #1 on: July 07, 2020, 06:43:02 PM »
I didn't look at your case study.

I personally think planning for 3% or 2.5% is too much.  But many people will disagree.  Over time (and I've been reading about FIRE a long time), when things are scary, people think that a 4% rule is too aggressive and argue for 3% or 2% or less; when things are booming and doing well, people think that a 4% rule is too conservative and argue for 5% or 6% or even more.

There are a couple of basic things you should know anyway:

1.  The Trinity study assumed that having $1 left at the end of the period was successful.  So in the first chart of data you included, that 100% success rate for 75/25 portfolios was including periods where you started with $1,000 and 30 years later had $1.  The first chart says you'll have at least a $1 left, not necessarily your original portfolio.

2.  The data in the first table only goes to 30 years.  If you're young and plan to live 40 years more, then 4% is only about 95% historically safe (again, by the $1 left definition in item 1).  For 40 year periods starting in the late 1960's, those would have failed a 4% withdrawal rate, mostly due to high inflation and poor market returns in the early 1970's.

3.  Your statement about the portfolio being infinite is not supported by the second chart of data you included.  That is the median portfolio value.  So yes, it'll be infinite *on average*, but the idea behind the 4% rule is to account for the *worst* periods in history.

ETA:  4% really boils down to a rough guideline anyway.  Your expenses will vary from year to year, it sort of ignores Social Security and inheritances and side gigs and paid off houses, your expenses won't go up exactly by inflation because your expense mix will differ from the basket they use for the CPI, and late in life you may have greater expenses due to illness or incapacity.  Most of all you'll probably make decisions that will increase and decrease your expenses over the remainder of your life.
« Last Edit: July 07, 2020, 06:46:13 PM by secondcor521 »

LWYRUP

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #2 on: July 07, 2020, 07:23:37 PM »
The Trinity study I believe also included high expense ratios, which now are no longer as prevalent.  However, there are also many, many top economists saying "be careful in being too optimistic about long term returns."  Basically, markets have been at historically high valuations for several years now and so that makes it more likely that future returns will be more muted (but nobody has a crystal ball). 

Personally, given current valuations I am leaning towards a 3.5% withdrawal rate.  I think 4% would be fine if you had some hard skills and were not adverse to jumping in and doing some part time work if needed.  For me, I have a family to support and a high income and high expenses, and it would be risky to walk away in prime earning years and then be scrapping for part time work later.  I might be more comfortable with 4% if things like valuations (and government debts) were more in line with historical averages. 

I think a 3% withdrawal rate is too conservative.  I mean, the 4% rule worked through the Great Depression and so 3.5% is already more conservative than that!  At some point, life is not risk free and you just need to live your life.  If you are prudent enough to amass the amount necessary to support yourself at a 3.5% withdrawal rate, you will probably also be prudent enough not to just sit there dumbfounded as all your money slowly disappears.  You will make changes.

The 4% rule is supposed to be a fixed withdrawal strategy.  It is most risky if the market crashes right when you retire (the "Sequence of Returns Risk").  One way to solve that is to have a bit of extra padding in bonds and to spend down that bond padding over the first five years.  Another way is to cut your spending if the market turns shortly after you retire, so that your withdrawal rate is based on your new, lower portfolio, or to pick up work until you back to the amount you retired with. 

Basically, 3.5% is close to bulletproof if you are prudent (which you will be, because you are analyzing this) and 4% is more risky, but as long you make sure that you can adapt so you can sort of "reset" on the 4% rule after an early market crash (either by cutting spending or by building your assets back up) you should be fine.   
« Last Edit: July 07, 2020, 07:32:54 PM by LWYRUP »

MDM

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #3 on: July 07, 2020, 07:49:42 PM »
A few things:
1) Table 3 is the one usually meant when people discuss "the Trinity Study" now: that's the one with inflation-adjusted withdrawals.
2) "The study did not adjust for taxes or transaction costs. An investorís own experience would differ depending on how much of his assets were in tax-deferred accounts,and the extent to which transaction costs could be held to a minimum using low-cost index funds."  In other words, the results assumed
- no taxes (so taxes must be included as an expense), and
- no fees on investment funds (so people paying 1% AUM fees can't count on the "4% rule" being successful for them).
3) The "4% rule" is neither a rule nor a guarantee.  It does suggest success if the future is no worse than the worst of the past.
« Last Edit: July 07, 2020, 10:45:45 PM by MDM »

MustacheAndaHalf

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #4 on: July 07, 2020, 10:40:28 PM »
Is planning for a 3% or even 2.5% withdrawal rate too much? I regularly see it from members so I thought it would be the right thing, but maybe it isn't? There's obviously no harm in doing too much of course, but if it's not needed, why not just enjoy FI when you know you got 100% chance of success?
I prefer "stress testing" my withdrawal rate by adding a higher percentage, like you're suggesting here.  Meaning you aim to retire on 3% to 3.5%, while making sure a 4% withdrawal rate is also likely to be successful.

markbike528CBX

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #5 on: July 07, 2020, 11:14:29 PM »

ETA:  4% really boils down to a rough guideline anyway.  Your expenses will vary from year to year, it sort of Completely ignores Social Security and inheritances and side gigs and paid off houses, your expenses won't go up exactly by inflation because your expense mix will differ from the basket they use for the CPI, and late in life you may have greater expenses due to illness or incapacity.  Most of all you'll probably make decisions that will increase and decrease your expenses over the remainder of your life.

I didn't look at your case study either,but...Is 4% withdrawal rate enough for 100% FI success?
Nope.
Nothing is 100%  Even the Trinity Study was only good for 95% and only for 30 years, and only includes liquid investments.
As secondcor521 noted your expenses probably won't match the CPI.

Playing with Fire UK

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #6 on: July 08, 2020, 12:30:26 AM »
What is it that you are looking for here?

You have the studies, we can't help you with that. The only thing that is left is how willing you are to respond in the unlikely circumstance that the future is different from the past (either market returns being poor or your spending increasing). In this case you either cut back your spending or you can go back to work. If you are unwilling to do either then consider working more now to reduce the odds of failure.

I find the engaging data chart really useful to visualise the odds of success, failure and the chances of the stash continuing to grow. On exactly 4% there is a real chance that the stash won't continue to grow or that longer retirements will fail if you stubbornly fail to adjust spending as you go.

If you are looking for the blessing of the internet, I hereby approve this plan: go forth and FIRE.

vand

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #7 on: July 08, 2020, 01:08:57 AM »
No withdrawal rate is 100% guaranteed.

Thatís not how it works.

All the Trinity study and all simulations have shown is what has worked in history, but that doesnít mean the future cannot be worse than the previous worse case scenario.

secondcor521

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #8 on: July 08, 2020, 01:24:49 AM »
Also, you could always read

https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

Where it has been discussed to death and then some.

helloyou

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #9 on: July 08, 2020, 02:49:46 AM »
Yes thanks for the feedback all. I've actually seen a more recent analysis where actually they look at FI from younger people. The previous study was only taking 30 years time, but here is the same chart but over 60 years:

https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/?fbclid=IwAR2JK4v026-55ym3zCXEmh9-m0zhigEkqSTtVruqBm9tt8gw3XNbv-1Lcs0

So depending on your circumstances:
- For normal FI aiming for 30 years retirement then 4% withdrawal rate is enough
- But for younger FI wanting 60 years of retirement then 3.5% withdrawal rate would give 100% lifelong success rate.

And yes this is from the past and it doesn't predict the future but it's strong enough reference point.


Ichabod

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #10 on: July 08, 2020, 09:58:21 AM »
Does anyone have data on SWRs when using a bond tent? The charts I've seen assume a static asset allocation.

secondcor521

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #11 on: July 08, 2020, 10:19:21 AM »
Does anyone have data on SWRs when using a bond tent? The charts I've seen assume a static asset allocation.

You might look at ERN's stock series.  I think he advocates for a bond tent and might have some data.  Last I looked there was not any sort of specific consensus on how much of a bond tent to use, at what rate to deplete it, etc., and the resulting SWR data would vary based on those factors.

DalioGold10

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #12 on: July 08, 2020, 03:27:21 PM »
Does anyone have data on SWRs when using a bond tent? The charts I've seen assume a static asset allocation.

You might look at ERN's stock series.  I think he advocates for a bond tent and might have some data.  Last I looked there was not any sort of specific consensus on how much of a bond tent to use, at what rate to deplete it, etc., and the resulting SWR data would vary based on those factors.

As per ERN's research, it seems that 60% stocks, 25% bonds and 15% gold supports the 4% WR.

https://earlyretirementnow.com/2020/01/08/gold-hedge-against-sequence-risk-swr-series-part-34/

secondcor521

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #13 on: July 08, 2020, 03:30:44 PM »
Does anyone have data on SWRs when using a bond tent? The charts I've seen assume a static asset allocation.

You might look at ERN's stock series.  I think he advocates for a bond tent and might have some data.  Last I looked there was not any sort of specific consensus on how much of a bond tent to use, at what rate to deplete it, etc., and the resulting SWR data would vary based on those factors.

As per ERN's research, it seems that 60% stocks, 25% bonds and 15% gold supports the 4% WR.

https://earlyretirementnow.com/2020/01/08/gold-hedge-against-sequence-risk-swr-series-part-34/

Maybe so, but that's not a bond tent as far as I can see based on a quick perusal of that part of the series.

Paul der Krake

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #14 on: July 08, 2020, 03:37:50 PM »
This is a eternal debate that comes up like clockwork. And it's still as pointless as ever, because there are no guarantees, and never will be.

You, however, are not a machine, set on a predetermined course for the next 50 years. You are a sentient being, with the ability to monitor your environment and make decisions based on what you observe. You can, and will, make portfolio adjustments, increase or reduce your expenses, move to new areas, start and leave part-time jobs. The list of levers you can pull is damn near infinite.

Have some faith in your adaptability.

SeattleCPA

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #15 on: July 08, 2020, 08:03:49 PM »
I didn't look at your case study.

I personally think planning for 3% or 2.5% is too much.  But many people will disagree.  Over time (and I've been reading about FIRE a long time), when things are scary, people think that a 4% rule is too aggressive and argue for 3% or 2% or less; when things are booming and doing well, people think that a 4% rule is too conservative and argue for 5% or 6% or even more.

There are a couple of basic things you should know anyway:

1.  The Trinity study assumed that having $1 left at the end of the period was successful.  So in the first chart of data you included, that 100% success rate for 75/25 portfolios was including periods where you started with $1,000 and 30 years later had $1.  The first chart says you'll have at least a $1 left, not necessarily your original portfolio.

2.  The data in the first table only goes to 30 years.  If you're young and plan to live 40 years more, then 4% is only about 95% historically safe (again, by the $1 left definition in item 1).  For 40 year periods starting in the late 1960's, those would have failed a 4% withdrawal rate, mostly due to high inflation and poor market returns in the early 1970's.

3.  Your statement about the portfolio being infinite is not supported by the second chart of data you included.  That is the median portfolio value.  So yes, it'll be infinite *on average*, but the idea behind the 4% rule is to account for the *worst* periods in history.

ETA:  4% really boils down to a rough guideline anyway.  Your expenses will vary from year to year, it sort of ignores Social Security and inheritances and side gigs and paid off houses, your expenses won't go up exactly by inflation because your expense mix will differ from the basket they use for the CPI, and late in life you may have greater expenses due to illness or incapacity.  Most of all you'll probably make decisions that will increase and decrease your expenses over the remainder of your life.

+1

Playing with Fire UK

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #16 on: July 09, 2020, 12:16:39 AM »
This is a eternal debate that comes up like clockwork. And it's still as pointless as ever, because there are no guarantees, and never will be.

+1. The search function for the site is poor, however you can search the site better by using a search engine and restricting it to the forum. Then you can read the previous topics on a subject before starting a new thread.

waltworks

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Re: Is 4% withdrawal rate enough for 100% FI success?
« Reply #17 on: July 09, 2020, 08:19:51 AM »
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/


When you're done reading all that, if you still have questions, post again.

-W